EC Midnight In The Garden Of Fallen Angels

Moody’s Tiina Siilaberg, who analyzes the high yield market, worries there’s more stress building in the pipeline: “There is a substantial amount of oil and metals & mining debt coming due over the next five years that is currently rated investment grade that could be downgraded.”

After the usual suspects in the commodities space, there are entire governments, as in South Africa, Russia, Turkey, Columbia and Indonesia, that are trading as if they’ve already been downgraded. They are followed on the lowly list by many of the lending institutions that financed the commodities producers, many of which will not get repaid. The only other standout for future downgrades is U.S.-based brick and mortar retailers, a double reflection of insufficient household income growth and a post-Amazon competitive landscape.

Could Jeremy Stein be right? Could credit market excesses possibly lead to a slowdown in the economy and not the other way around? That would seem to be the case given the latest survey out from the Young President’s Organization which found U.S. CEO confidence to be at the lowest in five years.

One has to wonder if the Fed is keen to test hell’s capacity. Given the work that Stein was doing while still inside the Fed, policymakers were at least aware that seven years of zero interest rates would inflate a mammoth credit bubble. We know that’s happened and is now un-happening: IG spreads are a mere six-hundredths of a percentage point shy of their 2001 recession highs.

If only the “what’s next” were more under our control. We can only hope that in aftermath of the inevitable bust to come, central bankers accept their limits and acknowledge their propensity to do more harm than good when our fallen angel elected officials fail to make good on their word.

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Gary Anderson 3 years ago Contributor's comment

So, my question is, when has the Fed ever let a bubble, whether it be housing or high yield or stocks, continue without paring them back? The Fed creates and destroys cycles. That's what they do. My problem is that they often misprice risk in order to blow the bubbles, and then the crash has to come.